U5D1-28 - Determine and Analze the Steps for the Case Study Project. Please follow all instructions and Reading material provided.

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Introduction

PEST analysis is a widely used tool for measuring market potential, i.e. its growth or decline, attractiveness, business opportunity and suitability of access. PEST is an acronym for Political, Economic, Social and Technological factors, i.e. those which are being used to assess the market for a busi- ness or organizational unit. Like SWOT analysis, Porter‘s 5 Forces analysis, Ansoff analysis, BCG Growth-Share Matrix, Porter‘s Generic Strategies, Scenario Planning, and Value Chain Analysis, PEST can be used to review a strategy or position, direction of a company or a marketing propo- sition. PEST is a good subject for workshop sessions and brainstorming meetings. The results of the PEST analysis are used for business and strategic planning, marketing planning, business and product development and research reports. In analyzing a company´s external environment, it is important to identify the factors that are likely to infl uence the organization’s supply and demand levels and its costs (Kotter and Schlesinger, 1979). The radical and ongoing changes occurring in the marketplace create an uncertain environment and have an impact on the functioning of the whole company (Tsiakkiros, 2002). PEST analysis is a meth- odology that helps us to categorize the infl uences in the political, economic, social and technological environments. Sometimes two additional factors, environmental and legal,

are added to make a PESTEL analysis. Other variations include PESTLE, PESTEL, PESTLIED, STEEPLE(D), and SLEPT analysis,1 in accordance to considering ecological, environmental, ethical, demographic and legal factors. The analysis examines the impact of each of these factors (and their interplay with each other) on the business. The results can then be used to take advantage of opportunities and to make contingency plans for threats when preparing busi- ness and strategic plans (Byars, 1991). PEST also ensures that a company’s performance is aligned positively with the forces that are affecting the business environment (Porter, 1985). PEST is useful when a company decides to enter its business operations into new markets and new countries. The use of PEST, helps to break free of unconscious assump- tions, and helps to effectively adapt to the realities of the new environment. The process of assembling the four basic perspectives of the PEST analysis always refl ects the company´s current

1 PESTLE/PESTEL: Political, Economic, Sociological, Technological, Legal, Environmental; PESTLIED: Political, Economic, Social, Technological, Legal, International, Environmental, Demographic; STEEPLE(D): Social/ Demographic, Technological, Economic, Environmental, Political, Legal, Ethical; and SLEPT: Social, Legal, Economic, Political, Technological.

THE APPLICATION OF PEST ANALYSIS BASED ON EBRD AND IBRD METHODOLOGY

Halík, J.

This paper discusses the possible applications of PEST analysis with the use of methodology and data from The European Bank for Reconstruction and Development, and The International Bank for Reconstruction and Development/ World Bank/International Finance Corporation. A practical example shows how to use the models when setting up a logistics service company in selected Central/Eastern European markets. The combination of PEST and EBRD/ IBRD reports is seen as a viable tool for measuring market potential, its growth or decline, as well as the attractiveness, business opportunity and suitability of access into these countries.

JEL classifi cation: M21

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position in the marketplace within given environmental circumstances. There is no general rule about which factors are more or less important. Such a task requires suffi cient managerial skills and business experience. Some exam- ples of topics might be the following: Political – which includes legal and regulatory issues – elections, employ- ment law, consumer protection, environmental regulations, industry-specifi c regulations, competitive regulations, inter-country relationships/attitudes, war, terrorism, poli- tical trends, governmental leadership, taxes, government structures, etc. Economic – economic growth trends across various countries, taxation, government spending levels, disposable income, level of unemployment, exchange rates, tariffs, infl ation, consumer confi dence index, import/export ratios, production levels, etc. Social – demographics (age, gender, race, family size, etc.), lifestyle changes, popula- tion shifts, education, trends, fads, diversity, immigration/ emigration, health, living standards, housing trends, fashion, attitudes to work, leisure activities, occupations, earning capacity, etc. Technological – inventions, new discoveries, research, energy uses/sources/fuels, communications, rates of obsolescence, health (pharmaceutical, equipment, etc.), manufacturing advances, information technology, internet, transportation, bio-tech, genetics, agri-tech, waste removal/ recycling, and so on. The incorporation of the four perspe- ctives gives a logical structure, provides clear presentation for further discussions and proactive decision making.

The EBRD Methodology Applicable for PEST Analysis The European Bank for Reconstruction and Development collects and disseminates a number of time series data. These data are collected for all countries of operations and are published annually in the Transition Report, which is a unique source of information on the developments in Central and Eastern Europe and the Commonwealth of Independent States (CIS). Drawing on the EBRD‘s extensive experience as an investor in the region, the Report offers comprehensive analysis of the transition to becoming a market economy and macroeconomic performance. Country-by-country asse- ssments comprise macroeconomic tables, including output and expenditure and foreign direct investment. They also provide key data on liberalization, stabilization, privatiza- tion, enterprise reform, infrastructure, fi nancial institutions and social reform. The sample economic developments in EBRD‘s countries of operations are examined in a series of country assessments and economic tables looking at GDP growth, infl ation and other economic factors (EBRD, 2012). The fi rst series includes selected macroeconomic indicators that provide basic macroeconomic statistics in key areas of the economy: output, employment, prices and wages,

government sector, monetary sector, interest and exchange rates and external sector. The second series provides forecasts of the main macroe- conomic indicators for transition countries. The appendix No. 1 shows forecasts for the years 2011-12. Structural change indicators, which are in the third series, provide a quantitative foundation for analyzing the progress in transition. The tables contain structural and institutional indicators in the areas of enterprises, markets and trade, fi nancial sector and infrastructure. In the fourth series, EBRD assesses progress in transition through a set of transition indicators. These have been used to track reform developments in all countries of operation since the beginning of transition. Progress is measured against the standards of industrialized market economies, while recognizing that there is neither a “pure” market economy nor a unique end-point for transition. Assessments are made in nine areas: large scale privatization, small scale privatization, governance and enterprise restructuring, price liberalization, trade and foreign exchange system, competi- tion policy, banking reform and interest rate liberalization, securities markets and non-bank fi nancial institutions, and infrastructure. The fi fth series of data helps to describe progress in transi- tion. Transition developments snapshots highlight qualitative or institutional developments in the areas of liberalisation and privatisation, the business environment and competition, infrastructure, the fi nancial sector and social reform.

The IBRD Methodology Applicable for PEST Analysis The International Bank for Reconstruction and Development, The World Bank and the International Finance Corporation have published four series of annual reports investigating the regulations that enhance business activity and those that constrain it. The sample one – Doing Business 2012 in a More Transparent World – presents quantitative indica- tors on business regulations and the protection of property rights that can be compared across 175 economies – from Afghanistan to Zimbabwe – and over time. Regulations affe- cting 10 areas of everyday business are measured: starting a business, dealing with licenses, employing workers, regis- tering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The indicators are used to analyze economic outcomes and identify what reforms have worked, where and why (World Bank and IBRD, 2012). The appendix No. 2 contents the complete set of indicators over six a selected Eastern and Central European country – The Czech Republic. The data can be used for construc- tion of a PEST analysis for selected territories in the world

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and allow straight comparisons of very important practical indicators of conducting business in different countries. They document the degree of regulation, such as the number of procedures to start a business or register commercial property. They gauge regulatory outcomes, such as the time and cost to enforce a contract, go through bankruptcy or trade across borders. They also measure the extent of legal protection of property, for example, the protection of inves- tors against looting by company directors or the scope of assets that can be used as collateral according to secured transactions laws. They measure the fl exibility of employ- ment regulation. Finally, a set of indicators document the tax burden on businesses. In the following text, an example for practical use of both EBRD and IBRD methodologies when assembling PEST analysis will be presented.

Case Study: The Practical Application of PEST in a Company’s Set-Up TransLog International Ltd. is a logistics service provider for the food industry. TransLog specializes in shipping peris- hable and frozen foods from the manufacturer to importers in other parts of the world. TransLog also distributes these goods domestically as a service provider for retail chains. The company has developed a unique system of tracking shipments and providing approved records, which show that the legal hygiene requirements are met at all times. These records are essential for retailers as they have to prove to health authorities that the goods are transported at a maximum temperature of +4°C for perishable and – 18°C

for deep frozen produce for example. TransLog has deve- loped special patented cooling cabins for trucks, trains, planes and ships that are self-regulating and are able to maintain constant temperatures in each segment of the cabin and measure the temperature of the goods constantly. Furthermore, TransLog has established a sophisticated dispatching and physical distribution system that allows TransLog to ship goods faster than other logistics providers. TransLog is a market leader in food logistics services in Western Europe, the US, Asia, and the Americas as well as in South Africa and Australia. Over the past 20 years, TransLog has enjoyed constant growth in operations as international trade with fresh and frozen food has steadily increased. The developed markets are slowly entering stagnant phases with only little future growth potential. TransLog has no compe- titor that offers such comprehensive services and such an extended logistics network for food. TransLog is now considering expanding into former Eastern Bloc countries as rising standards of living increase the demand for high quality and more exotic food. Furthermore, increased trade among EU-Member states and countries neighboring with the EU, especially Russia and CIS coun- tries, shows higher demands for chilled transportation services. TransLog sees great opportunities for further growth expanding into Central/Eastern European regions. TransLog’s logistical services are closely related to the stan- dard of living in regions and countries. Supermarkets and retailers demanding TransLog’s services are usually found in those countries where people are able to spend suffi cient amounts on high quality food. A GDP per capita of at least

Tajikistan Kyrgyz Rep

Uzbekstan

Moldova Mongolia

Turkmenistan Georgia

Armenia

Ukraine

Azerbaijan

Albania Bosnia&Herzegovina

FYR Macedonia

Montenegro

Belarus Serbia

Bulgaria

Kazakhstan

Russia

Romania

Latvia

Lithuania

Slovak Rp

Poland

Croatia

Hungary

Estonia

Czech Rep

Slovenia

1.000

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100.000

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A

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Figure 1: Country portfolio according to GDP and GDP/Capita

Source: EBRD (2012)

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$8,000 is seen as a minimum requirement. However to justify direct investments – especially into domestic distri- bution services – the country should have a certain market size. A total GDP of $100 billion is generally regarded as the cut-off line. TransLog also specializes in shipping bulk loads across borders. So transportation to major import and export or transition points is also important. Countries with large exports and/or imports of fresh produce are targets for investments. TransLog’s business needs relatively high investments for infrastructure such as warehouses, trucks and communica- tion and IT. These investments are highly specifi c and are long lived assets. Therefore, TransLog’s requirements for protecting their foreign investments and for political stability in targeted markets are high. Furthermore, shipments across borders are an essential part of TransLog’s services. Therefore speed and certainty in customs procedures are relevant criteria for targeting a region or country as well as positive macro-economic developments. TransLog’s pre-selection process consists of two indepen- dent levels – market size and wealth as well as major import/ export volumes. A third level takes a closer look at markets pre-selected by the former levels. This level examines the general business environment of the pre-selected countries. The selection of potential markets on the fi rst level is derived from the EBRD Transition Reports 2007-2012. From all Eastern, Southern and Central European countries as well as the Commonwealth of Independent States, all those that are insuffi cient in size (GDP < $100 billions) and that display a GDP per capita of less than $8,000 are eliminated from the

long list. Figure 1 and Figure 2 show the comparisons. The results show that Poland, the Czech Republic and Hungary are preliminary candidates for direct investments of TransLog. Estonia, Lithuania and Latvia could be grouped as one potential region for direct investments. The Slovak Republic could be analyzed in conjunction with the Czech Republic. Slovenia and Croatia could also be grouped as a potential region. Russia needs to be analyzed separately as it is extremely heterogeneous in terms of distribution of wealth and regional concentration of business. In terms of economic development, the Slovak and Czech Republics, Estonia, and Poland indicate above EU average GDP growth rates and relatively low infl ation. This indicates an increase in wealth leading to higher demand for exotic and imported foods. The second level of selection considers current volumes of food imported and exported and their trends. Food Exports from the EU to Russia increased substantially over the period. Moscow is the main region in Russia where imports go. Poland is the biggest trading country of the new EU-members; it also has the highest increase in exports. Same large increases were also recorded for the Czech Republic and Hungary. The most promising countries for direct investments from the market perspective are Poland, the Czech Republic, Hungary and Russia – see Figure 3. The Czech Republic could also function as a steppings- tone into Slovakia. The Baltic States together are not quite large enough in terms of volume, but could serve as a hub into Russia, justifying direct investments. TransLog’s busi- ness has three main criteria, which are essential for doing

Czech Rep

Hungary

Poland

Estonia

Latv

Lithuania Slovak RSlovenia

Croatia

Romania

Russia Ukraine

0,0

2,0

4,0

6,0

8,0

10,0

12,0

A nn ua l a ve ra ge C P I i nf la tio n

Positive Economic Outlook

Source: EBRD (2012)

Figure 2: GDP - Growth and Infl ation Forecasts for 2007-2012

Latvia

Republic

A nn

ua l a

ve ra

ge C

P I i

nfl a

tio n

GDP Growth Forcast

0,0 2,0 4,0 6,0 8,0 10,0

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Figure 3: Import/Export of Food Between CIS and Central European EU-Member States

Source: Eurostat, 2007-2012.

Russia

Hungary

Estonia

Lithuania

Latvia

Poland

Slovenia Slovakia

Czech Rep Baltic Sta tes together

CZ+Slov akia

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1

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E xp or ts of Fo o d in B ill io n E ur o

Most Promising Markets

business: conditions for trading across borders, registering property, and employing workers. Trading across borders and associated costs for bureaucracy (fees, charges storage in customs etc.) are important factors for TransLog as they infl uence demand for imported food. The higher the costs the less attractive international trade gets for food – limiting the potential for food logistics. It also infl uences the kind of products traded. Export and import fees in the Czech Republic and Hungary are the lowest amongst the selected set. Poland and Russia charge almost 2.5 to 3 times the fees that the Czech Republic charges – see Figure 4. Poland and the Czech Republic display suffi cient wealth and market size and trade food in relatively high volumes. Both countries show promising developments in their GDP at low infl ation rates. Russia mainly imports food – most of which is destined for Moscow. Moscow therefore repre- sents high specifi c volumes concentrated on a relatively small area. Demand for high quality food in Moscow is less dependent on infl ation of the local currency, as the segment of society that consumes these products is less concerned about prices in this area. Hungary – although attractive in terms of market size, wealth and import/export volumes – is not an attractive target market for TransLog as the extremely high cost of registering property prohi- bits any direct investments. Furthermore, the high infl ation rate and low GDP growth rate make large investments too risky in the near future. The Czech Republic and Poland are both EU-member states. In most cases, their legal systems are compliant with EU standards. The only limitation of

importance is the tradability of land. Foreigners are not allowed to acquire property. As it is TransLog’s policy to always found subsidiaries in its markets, there is no problem with this limitation. Current defi ciencies in transaction laws are also of lesser importance as TransLog does business solely under international law.

Results and Discussion The major contribution of this research is the formulation and presentation of a possible methodology of data-gathe- ring through PEST analysis, while taking advantage of EBRD and IBRD Country Reports. In our paper, Poland, Russia and the Czech Republic are the suggested countries for direct investment. Poland and the Czech Republic display suffi cient wealth and market size and trade food in relatively high volumes. Both countries show promising developments in their GDP at low infl a- tion rates. Russia mainly imports food – most of which is destined for Moscow. Moscow therefore represents high specifi c volumes concentrated on a relatively small area. Demand for high quality food in Moscow is less dependent on infl ation of the local currency, as the segment of society that consumes these products is less concerned about prices in this area. Hungary, although attractive in terms of market size, wealth and import/export volumes is not an attractive target market for TransLog as the extremely high cost of registering property prohibits any direct investments. Furthermore, the high infl ation rate and low GDP growth rate make large investments too risky in the near future. The

E xp

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Imports of Food in Billion Euro

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Czech Republic and Poland are both EU-member states; their legal systems are, in most cases, compliant with EU standards. The only limitation of importance is the tradabi- lity of land; foreigners are not allowed to acquire property. As it is TransLog’s policy to always found subsidiaries in its markets, there is no problem with this limitation. Current defi ciencies in transaction laws are also of lesser importance as TransLog does business solely under international law. Any legal suits are always brought in front of a US court. Managerial Implications The form of a case study can be applied in similar practical business situations. The text is namely aimed to small and medium enterprises that intend to expand abroad. PEST analysis usually serves as an essential part of business planning.

References

Byars, L. (1991). Strategic Management, Formulation and Implementation: Concepts and Cases. New York: HarperCollins.

EBRD (2012). Transition Report 2012, (accessed December 21), [available at http://www.ebrd.com/pages/research/ publications/fl agships/transition.shtml]

EBRD (2012a). Transition Development Snapshots, (accessed December 19), [available at http://www.ebrd.com/ downloads/research/economics/macrodata/sib.xls]

EBRD (2012b). Forecasts, macro data, transition indicators, (accessed December 19), [available at http://www.ebrd. com/pages/research/economics/data/macro.shtml].

Kotler, P. (1998). Marketing Management – Analysis, Planning, Implementation, and Control. Englewood Cliffs: Prentice-Hall.

Kotter, J., Schlesinger, L. (1979). Choosing strategies for change. Harvard Business Review, 57: 106-114.

Porter, M. (1985). Competitive Advantage. New York: Free Press. Tsiakkiros, A. (2002) Strategic planning and education: The

case of Cyprus. The International Journal of Educational Management, 16(1): 6-17.

World Bank, IBRD (2012): Doing Business 2012 in a More Transparent World. Washington: The International Bank for Reconstruction and Development / The World Bank.

Author

Ing. Jaroslav Halík, MBA, Ph.D. Senior Lecturer

University of Economics, Prague Department of International Trade, Faculty of

International Relations W. Churchill Sq. 4, 13067 Prague 3, Czech Republic

[email protected]

Poland Russia

Belarus

Romania Slovakia

Slovenia

Ukraine

Hungary

Lithuania

Czech Republic

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Cost to export

C os

t t o

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rt Lowest Trading Cost (per contaier)

Figure 4: Bureaucracy Costs of International Trade

Source: World Bank, IBRD (2012).

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Cost to export

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Appendix No. 1: Forecasts of Macroeconomic Indicators for Transition Countries in 2012

GDP Growth (average) Infl ation (average)

(year over year percent change)

Forecast 1/ Forecast 1/

2010 2011 2012 2013 2011 2012

Central Europe and Baltics

Croatia -1,4 0,0 -1,9 1,2 2,3 3,2

Estonia 3,3 8,3 2,3 2,5 5,1 4,3

Hungary 1,3 1,6 -1,5 0,4 3,9 5,5

Latvia -0,9 5,5 4,2 2,7 4,2 2,4

Lithuania 1,5 5,9 2,7 2,4 4,1 3,0

Poland 3,9 4,3 2,5 2,2 3,9 4,0

Slovak Republic 4,2 3,3 2,7 2,3 4,1 4,0

Slovenia 1,2 0,6 -2,5 -2,0 2,1 2,5

South-Eastern Europe

Albania 3,5 3,1 0,6 1,3 3,5 2,1

Bosnia and Herzegovina 0,7 1,3 0,1 0,4 3,7 1,9

Bulgaria 0,4 1,7 1,2 1,7 3,4 2,8

FYR Macedonia 2,9 2,9 0,3 2,0 3,9 3,5

Montenegro 2,5 3,2 0,3 0,8 2,9 3,2

Romania -1,7 2,5 0,5 1,9 5,8 3,5

Serbia 1,0 1,6 -0,7 1,1 11,1 7,1

Eastern Europe and the Caucasus

Armenia 2,2 4,6 5,0 4,0 7,7 3,0

Azerbaijan 5,0 0,1 2,0 3,0 8,5 1,5

Belarus 7,7 5,3 5,5 2,5 52,9 60,0

Georgia 6,3 6,9 6,5 5,0 8,5 0,0

Moldova 7,1 6,4 1,0 3,5 7,2 4,0

Ukraine 4,1 5,2 1,0 2,5 7,7 1,5

Turkey 9,2 8,5 3,0 3,7 6,5 9,1

Russia 4,3 4,3 3,2 3,3 8,4 5,1

Central Asia

Kazakhstan 7,3 7,5 5,5 6,0 8,4 5,3

Kyrgyz Republic -0,5 5,7 -1,1 7,0 16,6 2,7

Mongolia 6,4 17,5 11,5 16,0 9,1 15,0

Tajikistan 6,5 7,4 6,0 5,0 12,5 6,5

Turkmenistan 9,2 14,7 10,0 10,0 5,8 6,0

Uzbekistan 8,5 8,3 7,5 7,0 12,8 10,0

Southern and Eastern Mediterranean

Egypt 5,5 -0,6 3,2 3,8 10,1 8,0

Jordan 2,3 2,6 2,6 3,0 4,4 5,0

Morocco 3,6 5,0 2,3 4,5 0,9 1,9

Tunisia 3,2 -1,5 2,4 3,0 3,5 5,3

1/ As of October 12, 2012.

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Appendix No. 2: IBRD - Doing Business Country Indicators in 2012

CZECH REPUBLIC OECD high income GNI per capita (US$) 17,870 Ease of doing business (rank) 64 High income Population (m) 10.5

Starting a business (rank) 138 Registering property (rank) 34 Trading across borders (rank) 70 Procedures (number) 9 Procedures (number) 4 Documents to export (number) 4 Time (days) 20 Time (days) 25 Time to export (days) 17 Cost (% of income per capita) 8.4 Cost (% of property value) 3.0 Cost to export (US$ per container) 1,060 Minimum capital (% of income/1) 30.7 Documents to import (number) 7 Getting credit (rank) 48 Time to import (days) 20 Construction permits (rank) 68 Strength of legal rights index (0-10) 6 Cost to import (US$ per container) 1,165 Procedures (number) 33 Depth of credit info index (0-6) 5 Time (days) 120 Public registry (% of adults) 6.1 Enforcing contracts (rank) 78 Cost (% of income per capita) 10.9 Private bureau (% of adults) 95.7 Procedures (number) 27 Time (days) 611 Getting electricity (rank) 148 Protecting investors (rank) 97 Cost (% of claim) 33.0 Procedures (number) 6 Extent of disclosure index (0-10) 2 Time (days) 279 Extent of director liability (0-10) 5 Resolving insolvency (rank) 33 Cost (% of income per capita) 186.2 Ease of shareholder suits (0-10) 8 Time (years) 3.2 Investor protection (0-10) 5.0 Cost (% of estate) 17 Recovery rate (cents on the dollar) 56.0 Paying taxes (rank) 119 Payments (number per year) 8 Time (hours per year) 557 Total tax rate (% of profi t) 49.1

Source: IBRD - Doing Business 2012 in More Transparent World.

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